Note 5: Stock-Based Compensation

The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and key executives that consists of stock option and restricted stock components granted for retention and performance, (2) a discretionary equity program for management and other key employees, and (3) stock options and/or stock awards for non-employee directors. The Company’s Board of Director’s and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s 2008 Incentive Compensation Plan. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. Stock-based compensation expense totaled $3.6 million, $3.1 million, and $1.6 million in fiscal 2014, 2013, and 2012, respectively.

Stock Options: Compensation expense recorded in fiscal 2014, 2013, and 2012 related to stock options was $0.8 million, $1.1 million, and $1.3 million, respectively. The fair value of stock options that vested during fiscal 2014 was $0.8 million. As of March 31, 2014, the total compensation expense not yet recognized related to non-vested stock options was $1.3 million and the weighted average period in which the remaining expense is expected to be recognized is 2.6 years.

We estimate the fair value of option awards on the date of grant using the Black-Scholes option valuation model with the following assumptions for stock options granted in fiscal 2014, 2013, and 2012:

	2014			2013			2012
Weighted average fair value of options	$	7.76		$	4.26		$	10.45
Expected life of awards in years		6.3			6.3			6.3
Risk-free interest rate		1.3	%		0.9	%		1.9	%
Expected volatility of the Company's stock		88.7	%		87.4	%		79.6	%
Expected dividend yield on the Company's stock		0.0	%		0.0	%		0.0	%

Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of the common stock on the date of the grant. The risk-free interest rate was based on yields of U.S. zero-coupon issues with a term equal to the expected life of the option for the week the options were granted. The expected volatility assumption was based on changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based on historical patterns and the terms of the options. Outstanding options granted during fiscal 2014 vest 25 percent annually for the next four years. All outstanding options granted prior to fiscal 2014 vest 25 percent on the grant date and 25 percent annually thereafter for the subsequent three years. We used a pre-vesting forfeiture rate of 2.5 percent for these periods as an estimate of expected forfeitures prior to completing the required service period.

A summary of stock option activity for fiscal 2014 was as follows:

	Shares			Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, April 1, 2013		1.7		$	14.03
Granted		0.2			10.40
Exercised		(0.2	)		6.71
Forfeited or expired		(0.1	)		25.37
Outstanding, March 31, 2014		1.6		$	13.15		5.5	$	7.4

Exercisable, March 31, 2014		1.3		$	14.15		4.7	$	5.6

The aggregate intrinsic value represents the difference between the closing price of Modine common shares on the last trading day of fiscal 2014 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.

Additional information related to stock options exercised during fiscal 2014, 2013, and 2012 is as follows:

	2014		2013		2012
Intrinsic value of stock options exercised	$	1.1	$	0.1	$	0.2
Proceeds from stock options exercised	$	1.1	$	0.1	$	0.5

Restricted Stock: A summary of restricted stock activity for fiscal 2014 is as follows:

	Shares			Weighted average price
Non-vested balance, April 1, 2013		0.5		$	6.91
Granted		0.3			10.95
Vested		(0.2	)		8.67
Non-vested balance, March 31, 2014		0.6		$	8.66

Compensation expense related to restricted stock, using straight-line amortization, in fiscal 2014, 2013, and 2012 was $2.2 million, $1.8 million, and $1.1 million, respectively. At March 31, 2014, Modine had approximately $3.9 million of total unrecognized compensation cost related to non-vested restricted stock, which we expect to recognize over a weighted average period of 2.7 years.

Restricted Stock – Performance-Based Shares: Shares are earned under the performance portion of the restricted stock award program based upon the attainment of corporate financial goals over a three-year period and are awarded at the end of that three-year performance period if the performance targets have been achieved. A new performance period may begin each fiscal year so multiple performance periods, with separate goals, may operate simultaneously.

The performance component of the long-term incentive compensation program initiated in fiscal 2014 for the performance period from fiscal 2014 through fiscal 2016 was based upon a target three-year average consolidated return on average capital employed (“ROACE”), three-year average annual revenue growth, and Asia operating income at the end of the three-year performance period. For the program initiated in fiscal 2013, the performance award was based upon a target three-year average consolidated ROACE, cumulative revenue over the three-year performance period and Europe ROACE at the end of the three-year performance period. For the program initiated in fiscal 2012, the performance award was based upon a target three-year average consolidated ROACE and a target improvement in economic profit at the end of the three-year performance period.

During fiscal 2014, 2013 and 2012, Modine recorded compensation expense of $0.6 million, $0.2 million and ($0.8) million, respectively, related to performance awards. At March 31, 2014, Modine had approximately $1.7 million of total unrecognized compensation cost related to unvested performance-based restricted stock, which is expected to be recognized over a weighted average period of 2.0 years.

At present, we accomplish the fulfillment of equity-based grants through the issuance of new common shares. Under the Company’s 2008 Incentive Compensation Plan, 1.8 million shares are available for the granting of additional options and awards as of March 31, 2014.